Wednesday, January 26, 2011

The big question to arise from yesterday's disappointing growth figures is: can it really all have been about the snow?

Occasionally over recent months, I have referred to a forecasting model that I like to use. If the slump in the last quarter of last year was indeed due to the exceptional weather, then this model should fail to predict it. Indeed my model fails to predict the final quarter slump. So snow may have played a part. (Bear in mind, though, that this is a loose test - not least because the data I use in this model are industrial production data, and we know that manufacturing did relatively well in the last quarter.)

Despite this, the model's forecasts are not all that encouraging. They are that production will show modest growth (at an annualised rate of less than 2%) up to the late summer - but then it starts to fall off.

Plenty of caveats attach to a simple model of this kind (a neural net with a hyperbolic tangent squasher, 24 months of input data, 2 hidden layers, where the data are the 12-month change in logged index of industrial production data), or indeed to any economic forecast. But, for a simple model, the track record of this forecaster is pretty good. Snow may have played its part in the last quarter of 2010, but the recovery is nonetheless far from secured.

Tuesday, January 25, 2011

It's a double dip. The 0.5% contraction in the economy over the last quarter of last year represents a truly awful outcome. The government has been quick to blame poor weather towards the end of December. But that is clutching at straws.

The figures are considerably worse than the expected increase in output of around 0.4%. It represents a dreadfully weak platform on which to build the government's austerity measures. It is time for a reassessment.

Thursday, January 20, 2011

Figures released this week indicate an increase in the unemployment rate to 7.9% and an increase in the inflation rate to 3.7%. Both are a concern, and they bring to mind the 'stagflation' that was experienced in the 1970s.

Economics is often thought of as the 'dismal science' - when there is good news about unemployment, there is usually some bad news about inflation, and vice versa. When there is bad news about both, things get really dismal, and we really have to try hard to look for some good news. There may be some. Petrol prices have risen sharply; food prices have also increased. The price of oil does tend to fluctuate a lot (a fact not unrelated to the inelastic nature of both demand and supply in this market), and at close to $100 per barrel the price is now, if anything, above its steady state. The increase in the price of food has been driven largely by severe, but transient, weather events.

So where is the good news? As things stand, it looks as though inflation is blipping. It will rise further before falling - not least because of the effects of the January VAT increase. But as oil and food prices stabilise, the inflationary pressure should ease.

This does suppose that the inflation that we have experienced up to now will not feed through into wage increases. If it does, then stagflation indeed looms. The Bank of England's Monetary Policy Committee is sure to look closely at wage settlements over the coming months. If there were to be a general upward drift in wage settlements, then that would not be good news for inflation - wage hikes would feed through into further price hikes, and this would lead to wages and prices leapfrogging each other in an inflationary spiral. To avoid this, the Bank may need to raise the interest rate sooner rather than later - and that would further threaten the recovery. Let us hope that sense prevails.

Monday, January 10, 2011

LIBOR has been creeping up over the last quarter or so, and has now risen to 27 points above the Bank of England's rate. All is still not well in financial services.